(c) Credit Risk The key areas where the Association is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due, are
• Amounts recoverable from reinsurance contracts • Amounts due from Members • Counterparty risk with respect to cash and investments
Amounts recoverable on reinsurance contracts The Association is exposed to credit risk from a counterparty failing to comply with their obligations under a contract of reinsurance. In order to manage this risk the Board considers the financial position of significant counterparties on a regular basis, the Reinsurance committee monitors aggregate exposure to each reinsurer and the Association has set selection criteria whereby each reinsurer is required to hold a credit rating greater than or equal to “A” at the time the contract is made.
Amounts due from Members
Amounts due from Members represents premium owing to the Association in respect of insurance business written. The Association manages the risk of Member default through a screening process to ensure the quality of new entrants to the Association and the ability to cancel cover and outstanding claims to Members that fail to settle amounts payable. Amounts written off as bad debt have been minimal over recent years.
Counterparty risk with respect to cash and investments The investment policy manages the risk of default by limiting investment in instruments with a credit rating below “A” whilst also ensuring a diversification of the portfolio by asset, currency, geography, market and counterparty. The policy allows for investment in equities and absolute return funds to a limited amount. The majority of investments are in fixed interest securities and UCITS. Within these materially all investments are at least A rated with many relating to government or supra-national bodies.
The following tables provides information regarding aggregate credit risk exposure for financial assets with external credit ratings and the profile of the date at which amounts are due for settlement. The credit rating bands are provided by independent ratings agencies:
As at 20 February 2011 Amounts in $000
Debt securities UCITS
Forward currency contracts Cash balances
Amounts due from Members
Amounts due from Group Pooling arrangement Amounts due from reinsurers Accrued interest Sundry debtors
Total of assets subject to credit risk
Other Assets Equities
Absolute return funds Total Assets
AAA
521,095 235,414 -
- - -
4,531 -
- -
AA
51,601 - -
7,105 - -
- 119,136 172 -
- -
A Not readily avail- Total able/not rated
39,189 -
-
31,087 -
46,863 92,250 369 -
12,922 624,807 - 235,414 4,871
4,871 5,997
79,296 29,629
13,459
44,189 79,296 76,492
8,391 219,777 5
13,459 761,040 178,014 209,758 154,570 1,303,382
- 216,701 216,701 -
89,622 89,622 761,040 178,014 209,758 460,893 1,609,705 5,077
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